Tuesday, July 10, 2007

Innovation is the lifeblood of Silicon Valley. Technological and business model disruptions drive the cycle of category, company, and wealth creation.

Innovation often leads to high growth and growth often demands the introduction of processes to ensure quality and scale.

There is, however, an obvious tension between innovation and process, between standardization and disruption. How does a company best manage that tension and avoid the extremes of creative anarchy vs bureaucratic and rigid process?

Companies that optimize for scale often begin to look like eBay - a monolithic app that is always up but still looks the same five years later. While companies that optimize for creativity, like Handspring, stumble with quality and return issues.

BusinessWeek recently profiled the impact of process, via Six Sigma, on innovation in an article on 3M. In 2000, 3M hired Jim McNerney from GE and introduced a total quality management initiative designed to lower costs and drive efficiencies. The company cut 8,000 jobs, operating margins grew from 17 to 23%, and thousands of Six Sigma black belts were trained and turned loose on the company. The short term gains proved popular with Wall St, however, longer term cracks began to appear.

Historically, 3M prided itself of delivering 1/3 of its sales from products introduced over the last five years. Under the Six Sigma regime, however, the ratio of revenue from new products fell to 1/4 and the company lost its creative edge.

At Hummer Winblad, we believe that founders are the key creative sparks that drive innovation and vision.

A business school framework defines three classes of company: operational excellence, customer intimacy, and product leadership. VC-backed companies typically succeed via a focus on either customer intimacy or product leadership. Senior executive hires that seek to optimize operational excellence too early in the company's development tend to lead to frustrated engineers and a rigidity that eliminates the chance to innovate. The absence of innovation in a company with few customers or product offerings is an almost certain predictor of failure.

Ideally, our founder-CEOs add a wrapper of operational excellence to their core focus on product leadership and innovation. Rather than move founders to CTO roles and bring in "grey" hair CEOs to drive process-led execution, we would rather see the founder as CEO, infusing the culture and product with their passion and creativity while learning the "tools" of the management trade.

Process, moreover, can be brought in at the VP level to compliment innovation and to help institute best practices that help with visibility and predictability while working to avoid hindering creativity and a culture of trial and iteration.

In summary, it is hard to balance innovation and process, however, in early stage companies innovation is a prerequisite to success. Accordingly, it is often very dangerous to move company founders to staff roles and to hire senior executives with operational depth but little emotional or intrinsic connection to the product market and problem.

Just as it is hard to Six Sigma your way to innovation, it is hard to execute your way to disruption.

1 comment:

Like most things in life, there isn't a clear-cut disjunction between innovation or operational excellence. There must be balance, as you say, or else the firm will result in anarchy, or bureaucracy.

There is a concept of an innovation fulcrum. Imagine the value chain of product development, marketing, operations, and customer service. If product development is unbridled in their quest to grow the top-line by "pushing" new products, then complexity grows. How? Well, for each new product, perhaps a new production line needs to be created, marketing and pr teams mobilized, and customer service enabled -- all to support the products, at the product level. Indeed, all the "downstream" work and added complexity might grow past the point where the costs of complexity exceeds the revenues from the products brought to market: there is an inflection point such that the costs of complexity is equal to the revenue generated from the products.

Lean Manufacturing and Six Sigma seek to identify waste, variation, and unnecessary complexity and reduce or eliminate it. This goal can be a great thing for any firm, upstart or mature.

Here's my point: Process Excellence versus Innovation is a perceived tension, not an actual one. From experience at Amazon.com, Toyota, Mckinsey and, now eBay -- these are firms that are quite innovative, yet have demanded expertise in Lean and Six Sigma: from a pragmatic point-of-view, both work together quite well.